Market Insider

Reviewing Quality Conditions

September 22, 2016

Grain markets are starting to pull out of the rough patch they have been sitting for the past two months. One factor adding favour to the bulls’ camp is some United States (U.S.) dollar weakness, as things are getting a little more volatile ahead of the November 8 Presidential election (the first debate is on Monday, September 26). Also helping the bullish speculators is wetter weather across the Midwest and spotty rains in the Canadian Prairies slowing down Harvest 2016 progress significantly. If the negative conditions continue, it is quite possible that more speculators will jump into the market, invoking fresh memories of rains affecting harvest in Argentina this past April/May (and the corresponding rally). That being said, while it is hard to argue for a much smaller crop, especially for North America, the accuracy the market is trying to price in right now is when and in what condition it will come off in.

In Western Canadian cash markets, strength in soybeans has helped propel canola prices up about 20 cents per bushel in the past week, with basis remaining mostly flat for $10 handles starting to be seen again, as per pdqinfo.ca. On a side note, we have seen some strong canola movement on the FarmLead Marketplace as of late around this $10 psychologically-significant level. For the pulse markets, things to be generally rangebound, but well off of their highs from earlier in 2016 as India’s production potential continues to rise with some saying that domestic output could match the local demand of about 22 million tonnes. For wheat, disease continues to be on everyone’s tongue as vomitoxin and fusarium are being asked for by pretty much every grain buyer. As such, hard red spring wheat prices for movement before end of 2016 jumped the most, with average prices in Manitoba, Saskatchewan and Alberta sitting at $5.83, $5.63, and $5.90 per bushel, respectively. Durum had the best week of all though, up 4 per cent to an average Canadian Prairies price of $7.25/bushel for movement before end of 2016, as the amount of lower quality product is becoming more plentiful, making it a bit tougher to find the good stuff.

That being said, Statistics Canada came out with a new production estimate based off of satellite imagery and things are looking mostly bigger than what their report a month ago on August 23 was saying. For example, the durum wheat crop was raised from an already large 6.7 million tonnes to a massive 7.3 million tonnes (although a record crop, quality is the main question being asked right now. StatsCan’s estimates jumped from a 17 million-tonne canola crop to 18.3 million tonnes (closer to what the trade is expecting). Conversely, lentils, oats, mustard and barley production estimates were all lower than their August numbers. Regardless of why the numbers swayed, people are still very skeptical of the new process, as last year with the “eye in the sky” StatsCan estimated the canola crop at 14 million tonnes versus the 18 million tonnes it got settled at. Not exactly accurate is it?

Finally, watching some of the comments being passed along in negotiations on FarmLead these days, Canadian feedlots are losing about $400/head right now with fed cattle prices down about 30 per cent from a year ago. That being said, one of Canada’s largest feedlots, Western Feedlots, which has capacity for 100,000 head, is closing its doors. Doing some rough back-of-the-envelope math, at 20 lbs of feed consumption per day, per head would suggest on an annualized basis that about 250,000 – 300,000 metric tonnes of feed demand loss from the closing of one operation. Between some of these numbers and the large supply of feed-quality grain hitting the market this Harvest 2016, our call remains that feed grain prices will remain depressed. Thus, moving lower quality grains now is likely easier to do and better for your balance sheet, than trying capture carry that is not there today by storing it in your bins or selling the higher grade quality stuff.